Private to Public

May 2, 2004

Domino's Pizza will soon be selling slices ... of its business, through an initial public offering.

The Ann Arbor, Mich.-based chain announced April 13 it wants to raise $300 million through a stock offering in order to pay down debt.

Since 1998, when Bain Capital bought a 93 percent stake from Domino's founder Tom Monaghan, stock watchers have speculated when it would move to maximize its believed-to-be $1 billion-plus investment.

But even now that Domino's intentions are official, when the official stock offering will occur isn't known. Depending on how quickly Domino's files all the appropriate paperwork with the New York Stock Exchange (where it anticipates trading under the symbol DPZ), market analysts say it could light up the Big Board in anywhere from 30 to 90 days.

According to

What's Important

After 44 years, Domino's Pizza is going public.

Market analysts say the timing of Domino's IPO is favorable, given the positive performance of other restaurant stocks, as well as the broad market itself.

Unlike some companies, which use public offerings to fund rapid growth, Domino's aims to use the new capital to pay down debt and boost profitability.

Rick Aristotle Munarriz, a writer and market analyst for The Motley Fool, during this time—called the "quiet period," when officials from Bain and Domino's become as silent as cigar-store Indians regarding company information—Bain will conduct a "road show" in which it courts the support of institutional investors (mutual funds, banks, insurance companies, among them). Bain's goal, Munarriz said, is to have those investors committed to the entire $300 million offering before the stock goes public.

"What they're doing at that time is trying to figure out a good price for the stock, and these institutional investors are telling them whether it's too high or too low," said Munarriz by phone from Miami. "The final offering price will typically be low enough to where those investors can sell it and see some appreciation fairly quickly, but not so high that it doesn't move."

Munarriz also said the fact that the "average Joe investor" likely won't get a slice of Domino's stock in the early going is a good thing, because a full commitment by institutional investors shows promise for the stock.

"If someone like me is able to get shares at the offering, then it's a dog and I don't want it," he said. "It's sort of like Woody Allen's old quote: 'I don't want to join a club that would have me as a member.' (Institutional investors) are not going to get in there and flip it and make the stock tank."

Why share?

As a 44 year-old company with 7,400 units, Domino's is a vastly different operation compared to Pizza Hut and Papa John's when they went public. At Pizza Hut's 1969 IPO, the 11-year-old chain was about 400 units strong; Papa John's had about 230 units when it did the same in 1993, when just 8 years old. The goal for both companies was to grow their systems rapidly, and each succeeded within that model.

Domino's aims are a bit different. As a well-established, profitable company, it's not seeking to grow its business quickly or make a lasting market impact. It's been there, done that.

But it does need to unload some of the $959 million in debt still on the books from the Bain purchase. While some debt is good, too much can drag down profits, said Dean Haskell, director at JMP Securities in San Francisco, and going public is one way to relieve that pressure.

"This is an opportunity for Bain to take some money off the table after they've had the investment for a while," said Haskell. "Paying down debt (this way) doesn't change the value of the company, but it lowers the debt ratios and helps profitability."

It also provides the company a stronger bargaining position when it buys in bulk or borrows more money.

"If they borrow, they can do it at a more favorable rate, that reduces interest expenses," and it boosts profits, Munarriz said.

Selling off shares of the company also could fund international growth initiatives or help broaden Domino's own portfolio by acquiring other companies.

"This gives them some different strategies to consider for growing the business," Haskell said.

Will they buy?

Will the market be interested in Domino's?

That's the $300 million question.

None of the three analysts interviewed expect Domino's to set the market on fire as Krispy Kreme did at its IPO in 2000. After the doughnut giant's stock opened at $21, it traded as high as $108 before splitting several months later. At a second offering in 2001, the stock opened at $67 a share.

And yet, none of them expect Domino's to follow the soar-crash-and-burn path of Boston Chicken's (later changed to Boston Market) 1993 IPO.

start quoteLet's face it: unless there's something different in the story that I don't know—and I've not read (the S-1) yet—unless they're going to use the $300 million to buy Papa Murphy's ... how are they going to grow the business?end quote

-- Mike Smith,
Analyst, Oppenheimer

The stock launched at a breathtaking $50, but five years later it plummeted to 50 cents a share in the wake of the very accounting scandals that allowed it to fetch such a high offering price. In 1998, it filed for bankruptcy.

No, Domino's will neither dazzle nor disappoint upon its launch, according to analysts; its "sparkling record" of accounting will appeal to some investors, Munarriz said, but as a well-established company in a mature industry, it won't be viewed as a high-growth stock, either. The profit-crushing weight of record cheese prices and rising costs for toppings may give potential investors additional cause for concern.

"The timing is a bit peculiar right now with the industry being in a bit of upheaval with the soaring cheese prices," Munarriz said. "But as far as stock market, it's been consistently high for about the last year and change, so perhaps (Bain) thought it's now or never."

Haskell said high cheese prices today will at least make very favorable comparisons for the stock when things settle down in the months to come. And investors, he added, expect an experienced company like Domino's is better prepared than most pizza companies to weather such crises anyway. Overall, both the restaurant industry and restaurant stocks are performing well, which should shine some favorable light on a respected firm like Domino's, he said.

"The restaurant industry is an improving business, and as the economy goes, the restaurant business should lead it," Haskell said. "Valuations are stabilizing ... and it's an opportunity in a rising tide to float your boat and see where the market takes you."

Such news is good, but Oppenheimer analyst Mike Smith said that while the industry is rebounding steadily, his firm has little interest in Domino's offering. The highly competitive pizza delivery segment isn't yielding the attractive returns of several years ago, he said, and a company like Domino's will always be in the thick of that battle.

"It's not going to be anything that will interest us particularly, unless they price it real attractively," said Smith, whose office is in Kansas City, Mo.

Smith said several things darken his mood regarding Domino's, including current cheese prices and its debt load. Additionally, the fact that the bulk of the chain's 2003 comparable-store sales gains came from its overseas units—which comprise less than a quarter of its overall system—shows its domestic system performance is about flat.

"Let's face it: unless there's something different in the story that I don't know—and I've not read (the S-1) yet—unless they're going to use the $300 million to buy Papa Murphy's ... how are they going to grow the business?"

Public reaction

Is a publicly held Domino's any more fearsome than the private version? Not for the present, analysts said, and certainly not in the mature U.S. pizza market. Its competitors know it well and won't be forced to watch their backs constantly as they might if a new, well-heeled and aggressive player were coming to town.

If its focus is profitability through debt repayment (though only 40 percent of the IPO's yield is earmarked for that purpose), the company's bottom line will benefit while not punishing competitors, Munarriz said. New capital—and the potential for subsequent stock offerings—could, however, fuel overseas expansion, where Domino's has proven successful.

Mostly, said Haskell, the influx of capital allows Bain to get a return on its investment and Domino's future shareholders to earn increasing dividends over time. Proven, well-run foodservice companies may not be the sexiest offering on the Big Board, he said, but they do represent safety and security for investors still licking their wounds in the wake of the most recent recession.

It won't churn out quick profits like a rapid-growing firm, Munarriz added, but he doesn't see such a good company sliding backwards, either.

"Once a company is as prolific as this company is, it's hard to make some serious money off of it," Munarriz said. "No one's going to quadruple their money off a Domino's Pizza investment in the next year.

"But Dominos Pizza isn't going anywhere, either; there's some stability in there. The fact that they're paying down debt is attractive, and if they don't pay everyone big bonuses, that will be good, too. But I'd like to see what the earnings look like on a cleaner balance sheet, which I think will happen with the offering."

Topics: Domino's Pizza , Public Companies

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